Could we finally see real change in Japan?

I don’t remember ever having to wait anywhere for a taxi in Japan. When I lived in Tokyo in the 1990s all you had to do was think about raising your hand and a nice Toyota Comfort stopped to pick you up. You didn’t always get where you wanted to go, though: anyone can be a taxi driver in Japan and no particular road knowledge or driving skill appears to be required.

The only thing that taxi drivers really had in common, even back then, was that they were all relatively old men. It’s a point picked up by Robert Brooke in a note from Halkin Services this week. The huge surplus of taxi drivers, he says, was a natural side effect of the financial crisis of the 1990s taking hold. The demand for taxis fell fast. But as employers in the construction and manufacturing industries slowed and the “pool of older men looking for work grew” so did the supply of drivers: a situation compounded by “newcomers working ever-longer days to multiply meagre takings per hour by more hours worked – only for them to make it collectively impossible to thrive.”

Nothing has changed since the 1990s: raise your hand in Shibuya today and a taxi will come just as fast as it did in my falling-out-of-city-bars days. It is tempting to look at this and to think of it as a permanent situation – an enduring symbol of the failure of Japan to change for the better. But it isn’t so. As Brooke says, the cars can’t last forever and in the end even Japanese men will have to “give way to age”. There will come a day when the fact that no new cars have been bought for decades and no new people have entered the trade for decades will mean the Japanese will start having to spend the last part of their evenings out in a desperate battle for a taxi, just as the rest of the world’s city dwellers do.

This brings me to the rest of Japan. As far as the bears (most people) are concerned, Japan can’t change. It is stuck in some kind of long-term paralysis where it is unable to restart its economy; unable to sort out its hideous debt problems (over 200% of GDP!); unable to raise tax revenues in the face of its falling population; and unable to do anything about its regular bouts of recession and deflation. It is, Michael Woodford told me last week in a longer interview about his ousting as chief executive of Olympus, “rotting from within”. But this isn’t entirely fair. The other way to look at it is to look not just at the economy but to look at the yen and the effect of the yen on the economy.

It turns out, say the analysts at GK Research, that Japan has spent the global recession acting as a “shock absorber” for the rest of us. Since the financial crisis began most countries have worked to protect their domestic economies by debasing their currencies one way or the other. They have slashed exchange rates, indulged in rivers of quantitative easing and made it clear they will keep doing so until it works – which could be a very long time. Japan found this tricky. Its rates were already at rock bottom and prices were already falling. The result? While inflation-adjusted interest rates in much of the West are negative, in Japan they are still positive (around 1%). That’s made the yen very expensive relative to other currencies.

On GK’s numbers the yen is 25% overvalued against the US dollar, 15% or so overvalued against the euro, and a nasty 70% overvalued against the won – the currency of its major competitor, South Korea.

An overvalued currency tends to mean falling exports – who’s going to buy a Japanese car if it is 70% more expensive than a Korean car? That’s why Japan’s trade surpluses have collapsed; why the likes of South Korea and Germany have been steadily stealing its market share; and one of the reasons why its corporate profits are so low.

You might at this point ask why Japanese policy makers don’t do more to protect their electorate and to push the yen down. The answer is that they will. There was an election on Sunday, which Shinzo Abe of the Liberal Democratic Party won decisively. He is now expected to have a go at pushing through a programme of aggressive money printing with a view to weakening the yen.

Can he do it? There is a lot of sniffing about this being yet another false down for Japan, but there is certainly a section of the market that thinks he might. Shares in the big exporters have started to rally in anticipation of the rising profits that will come with a falling yen.

I’ve been suggesting to readers that they have some exposure to Japanese stocks for years now, on the basis that they are cheap, and cheap is pretty much the only indicator of any long term use when it comes to stock markets. It hasn’t been the best advice ever, but we have nonetheless been protected to a degree by the rising yen – much of what we have lost on the market we have gained on the currency.

Happily this might now (finally . . .) be about to turn: if Abe does what he says he wants to do, we will lose a little on the currency but we will make a whole load more on the market.

• This article was first published in the Financial Times

Mike

Merryn – you say that the rise of the Yen compensated for the fall of Japanese equities, but that the hoped for fall in the Yen will be more than compensated for by a huge rise in equities. Is it reasonable to expect this asymetrical result? Japan’s problems may not be simply down to lack of price competiveness although the greater profitability of the export sector following any devaluation will provide the resources to invest in making up for lost ground. South Korea is not only far cheaper but its products have improved enormously in recent years – think of Samsung and Hyundai/Kia. Meanwhile the quality reputation of Japanese products has taken a bit of a battering as with Sony, Honda and Toyota which no longer have the invincible image they once had. Perhaps the smaller company sector will have more to offer this time in Japan? I’m less concerned by the debt and demographics arguments than the governance and attitude to sharholders issues.

Sjoerd

Why, in Moneyweeks writings, is money printing good for Japan (“protect their electorate”) and bad for the UK?

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